Media Firms Get On The Sidelines

Where did Moreno find the $180 million? The 56-year-old advertising tycoon made his fortune by building a small billboard business into an enterprise worth billions. Moreno, who lives in Arizona, is no stranger to ownership of sports teams. He has owned stakes in a number of baseball teams, including the Arizona Diamondbacks, winners of the 2001 World Series Championships.

While having a Hispanic owner in MLB is only logical, especially in the Los Angeles area, the Disney sale does raise some questions:

If synergies are so important to media firms, why shed assets in pro sports?

Disney was not alone to enter the fray; AOL Time Warner owned the Atlanta Thrashers (NHL) and the Atlanta Braves (MLB); News Corporation owned the LA Dodgers (MLB); and the list goes on.

Yet all of these media firms sought to, or are presently trying to, get rid of these assets.

In hindsight, analysts wonder why a media firm would enter the pro sports domain. However, it did make sense at the time.

Ironically, it also makes sense for these media firms to get out now. Why? The problems affecting media firms are systematic: the advertising market cratered and piracy hurt earnings across the board. What made matters worse is that much of the financing to acquire the pro sports franchises was done with debt.

Warren Buffett, chairman of Berkshire Hathaway Inc., was known for many of his tenets, none more important than "you never know who is swimming naked until the tide goes down." In other words, in good times, having too much debt was not as problematic as it was in bad times. When the media firms' core operations took a hit, the downside was exasperated due to the heavy debt loads.

In the end, a franchise is very much like any other business: it is its ability to generate free cash flow that makes it valuable, nothing else. When it comes to Disney, the Ducks and the Angels, when the final out was called and the players skated to their dressing rooms, the bottom line was that the franchises were money losers, rendering any synergy — no matter how attractive in theory — useless in practice.

The lesson is that unless you are a wealthy individual who is willing to play with his or her money, stay on the sidelines. And that is where media firms belong in the end.